tag:blogger.com,1999:blog-34239967015972565482017-07-29T13:33:38.944+05:30Varun Khandelwal's blogthoughts on economics, finance and trading ideas... and other stuff I find interesting.Varun Khandelwalnoreply@blogger.comBlogger82125tag:blogger.com,1999:blog-3423996701597256548.post-10957736451586348662013-10-27T15:52:00.002+05:302013-10-27T15:52:32.988+05:30Some interesting quotes from Ed Seykota<b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">(1)</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">&nbsp;The key to&nbsp;</span><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">long-term survival and&nbsp;prosperity</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">&nbsp;has a lot to do with the&nbsp;</span><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">money management&nbsp;</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">techniques incorporated into your&nbsp;</span><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">technical system</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">. There are old traders and there are bold traders, but there are very few old bold traders.</span><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">(2)&nbsp;</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">All trading has some kind of system.</span><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">&nbsp;Most good systems following trends</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">. Life itself is based on trends. Birds start south for the winter and keep on going.</span><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">(3)&nbsp;</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">Fundamentals you read about are typically useless as the market has already discounted the price, and I call them</span><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">&nbsp;"funny-mentals"</b><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">(4)</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">&nbsp;What's important to me in any trade are (a)&nbsp;</span><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">the long term trend</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">; (b) the chart pattern; and (c) picking the right buy and sell. A distant fourth are fundamentals.</span><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">(5)</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">&nbsp;I&nbsp;</span><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">don't try and pick tops and bottoms</b><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">(6)&nbsp;</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">Pride is a great banana peel... as are f</span><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">ear, hope and greed</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">. My biggest slip-ups&nbsp;occurred&nbsp;shortly after I got&nbsp;</span><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">emotionally involved</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">&nbsp;with positions.</span><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">(7)</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">&nbsp;The three elements of good trading are</span><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">&nbsp;(1) cutting losses; (2) cutting losses; and (3) cutting losses</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">. If you follow these three rules... you "may" have a chance.</span><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">(8)&nbsp;</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">I handle losing streaks by trading smaller.</span><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">(9)</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">&nbsp;I set&nbsp;</span><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">protective stops</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">&nbsp;as soon as I enter a trade. I normally&nbsp;</span><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">move these stops</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">&nbsp;to lock in profit as the trend continues. Losing a (profitable) position is aggravating, whereas losing your nerve is devastating</span><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">(10)&nbsp;</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">My maximum equity at risk on any one trade is&nbsp;</span><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">5%</b><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">(11)&nbsp;</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">My success comes from my love of markets. I am not a casual trader.&nbsp;</span><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">It is my life</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">. I have a passion for trading. It is not merely a hobby or a even a career choice. There is no question that this is what I am supposed to do in life.</span><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">(12)&nbsp;</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">The trading rules I live by are (a) cut losses; (b) ride winners; (c) keep bets small; (d) follow the rules without question; and (e) know when to break rules</span><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">With respect to (e) - systems and method are constantly being refined. A rule is changed when it no longer works</span><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">(13)</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">&nbsp;I&nbsp;</span><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">ignore advice</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">&nbsp;from other traders</span><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">(14)</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">&nbsp;Having a quote screen is like having a slot machine on your desk - you end up feeding it all day. I get my price data after the&nbsp;</span><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">close each day</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">. That's it (note: Ed only used one computer - not a dizzying array of screens we see today)</span><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">(15)</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">&nbsp;A losing trader can do little to transform himself into a winning trader. A losing trader is not going to want to transform himself. That's the kind of thing winners do. Winning traders have usually been winning at whatever field they are in for years.</span><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">(16)</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">&nbsp;A good trader (a) loves to trade; and (b) loves to win</span><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><br style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;" /><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">(17)&nbsp;</b><span style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">I don't judge success. I celebrate it. I think success has to do with funding and following one's calling&nbsp;</span><b style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18px;">regardless of financial gain.</b>Varun Khandelwalnoreply@blogger.com0tag:blogger.com,1999:blog-3423996701597256548.post-79669419260473731642013-08-23T09:01:00.000+05:302013-08-23T09:01:10.986+05:30Column: Time to be cautiously optimisticOn India in the <a href="http://www.financialexpress.com/news/column-time-to-be-cautiously-optimistic/1158830/0" target="_blank">Financial Express</a><br /><br /><blockquote class="tr_bq"><h1>Column: Time to be cautiously optimistic</h1><br />Indian assets have been under a lot of pressure in the last few days. The combination of a rapidly depreciating rupee, monetary tightening by RBI and decelerating growth have triggered a very sharp fall in Indian equities. The Nifty 50 index has declined about 11% in the month since RBI’s monetary policy tightening late July.<br /><br />The recent fall in Nifty masks much deeper cuts in the broader markets. It has been nothing short of a bloodbath in most of the sectoral indices—banking, real estate, infrastructure were all down over 20% with individual names falling by as much as 40-50%.<br /><br />To add insult to injury, several international and domestic brokerages have started downgrading Indian bonds and equities. Earning per share (EPS) estimates are being cut, the GDP baseline growth rates have been revised to between 4% and 5%. One hears of targets on the rupee coming in the range of 70 to a dollar; wild estimates of downsides on the Nifty abound daily on the markets. It is a bear market!<br /><br />While there is serious pessimism surrounding the economy, it is important to keep in mind that markets usually price-in most publicly available information. To the extent expectations have moved lower, prices move lower as well and there is less room for negative surprises. Looking at the major issues weighing on the minds of institutional investors and assessing their reflection in prices is useful in determining whether or not to buy equities.<br /><br /><b>Pessimism on growth &amp; rupee</b><br /><b>&nbsp;</b><br />The biggest disappointment in India has been with growth. India has long been viewed as a growth story with low correlation with global growth owing to strong domestic consumption and favourable demographics. GDP growth, and especially investment as a percentage of GDP has been falling. Various scams and political agitation in 2012 caused policy paralysis which led to a sharp slowdown in investments as clearances stalled, projects were delayed, and the government machinery literally came to a standstill. Subbarao’s war on inflation continued to brutalise growth prospects. The death blow to residual growth expectations in India came after RBI announced liquidity tightening measures in July. Most analysts have downgraded their base case GDP growth expectations to about 4.8-5%. The bear case scenario comes in between 4% and 4.5%.<br /><br />The rupee also poses a rather serious problem. Foreign investors have a strong distaste for countries with depreciating currencies. Rupee depreciation elicited monetary tightening by the central bank. Higher interest rates exert further downward pressure on growth and on the banking system—it is a vicious cycle. As argued in my previous article (FE, August 6, http://goo.gl/gP9X1d), RBI’s measures were misguided. They failed to have a meaningful impact on the rupee while wreaking havoc in the money markets.<br /><br /><b>There is hope</b><br /><b>&nbsp;</b><br />RBI seems to have realised this. It has announced infusions of fresh liquidity to the tune of Rs 8,000 crore in the banking system and adjusted prudential limits to permit more liberal marking of banks' bond portfolios as the losses “could be expected to be largely recouped going forward”. Further, the central bank reduced its damaging communication with the markets on its purported policy stance on the rupee while stepping up on its interventions in the currency markets.<br /><br />A month ago, extreme price targets for the rupee ranged from 61 to 63. Some offshore NDF desks expected the range for the rupee to shift upwards to the 60 to 65 zone. This, too, has materialised. Many foreign investors find value in the rupee at spot levels above 60, but are fearful of investing in India till they see signs of growth or investments picking up.<br /><br />Further, indications of reversal in liquidity will certainly be helpful in this respect. RBI governor-designate, Raghuram Rajan, offers much hope to investors in India; he is seen as strongly pro-growth. Expectations of pro-growth rhetoric and action from him in September are increasing.<br /><br />Investors do not expect overnight miracles from India. The fiscal and current account deficits are here to stay. They understand the dynamics of the Indian election cycle—most private sector investments and projects are usually put on hold till after the elections. Scams being scrutinised by the Supreme Court will delay policy measures in those areas. Recent analyses indicating a hung Parliament in 2014 weigh on investors. While tail risks remain, the fear of imminent sovereign downgrades has been mitigated as Moody’s and S&amp;P affirmed their ratings on India in August.<br /><br />What investors want is for India’s growth not to fall below 4% levels. The government seems to have understood that piecemeal measures will not work, and that growth is crucial. Constrained on the fiscal side, and knowing that the private sector will stay away till after elections, public sector enterprises with cash-rich balance sheets are being instructed to take the lead in stimulating the economy. According to the economic affairs secretary, Arvind Mayaram, the finance ministry is monitoring investments by PSU firms on a monthly basis. The government is working overtime to grant clearance to stalled projects and redress the problems plaguing many ongoing private sector projects. In desperate attempts at attracting FDI, the government has increased limits and liberalised FDI across sectors and reduced red-tapism by moving several sectors to the automatic route. <br />What we have at present is a stalled economy, weak currency, a large array of economic reforms, a government desperately issuing clearances and approvals, and a pro-growth governor taking the helm at RBI. The largest problem facing the Indian economy is a lack of confidence—from both, domestic and international investors and corporates. The present prices largely reflect these negative sentiments and the data surrounding the Indian economy.<br /><br />Come FY15, we will see investor confidence return as a new government takes charge at the Centre and policymaking becomes more decisive, and unconstrained by electoral objectives. The government will take office with a liberal FDI regime, a lot of project backlog cleared, investments being stimulated by PSU, and reduced pressure to divert revenues to social schemes. While it is not a clear case for either the Congress or the BJP, it is clear that we will not have a third-front forming the government.<br /><br />The formation of a stable government will be the trigger to the beginning of a new bull run in Indian equities. Equities will remain volatile in over the next two quarters reflecting the fluctuating sentiments of market participants due to global and domestic factors. Indeed, we may see a further from these levels in the Nifty index. However, this period of pessimism should be used as an opportunity to accumulate good quality Indian stocks selling at distress valuations. To quote Warren Buffet, “be fearful when others are greedy, and greedy when others are fearful.” India is in the process of bottoming out.<br /><br /> <br />The author is managing director, Bullero Capital, a Sebi-registered portfolio manager<br /></blockquote>Varun Khandelwalnoreply@blogger.com0tag:blogger.com,1999:blog-3423996701597256548.post-45112124763676069572013-08-09T16:45:00.001+05:302013-08-09T16:45:23.274+05:30Raghu, what can we expect from you?<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;">Finally. Something to be optimistic about on India! Raghu's appointment fixes one part of the problem. His background - IIT, IIM, MIT, Chicago - is encouraging in that he will speak to the right people, and have a more nuanced understanding of the world we live in.&nbsp;</span><br /><span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;">My expectations on the policy front</span><br /><br /><ul><li><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><b>Growth will be emphasised</b>Near term, his policy actions may not be dramatic, but the rhetoric from the central bank will change significantly. He will certainly talk more about growth, and de-emphasise the need for monetary tightening. This isn't to say that he'll roll back the measures on the rupee immediately - thats a nice hole dug up by Subbarao; will take some effort getting out of.<br /></span></li><li><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><b>RBI will be dovish</b>He won't try to bring down international commodity prices and demand for food by raising interest rates. Unfortunately, he can't do away with the Minimum Support Price (MSP) system or the government's vote-for-populism strategy. What he can do is bring rationality to monetary policy again.<br /></span></li><li><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><b>Greater coordination with the Finance Ministry</b><br />Monetary and fiscal policy will be more coordinated - there won't be media transmitted spats between the FM and the RBI as Raghu is very much a Finance Ministry man.</span></li></ul><ul><li><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><b>Measures on the rupee will be rolled back once we get to around 58 on the spot. </b>This can happen rather soon - say in 2 to 4 weeks.</span></li></ul><div><br /></div><div><br /></div><div><span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><br /></span></div><div><span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><br /></span></div>Varun Khandelwalnoreply@blogger.com0tag:blogger.com,1999:blog-3423996701597256548.post-3585871195423029872013-08-06T08:58:00.000+05:302013-08-06T08:58:03.100+05:30Column: Don’t kill the messenger, read the messageOn the rupee in the <a href="http://www.financialexpress.com/news/column-don-t-kill-the-messenger-read-the-message/1151500/0" target="_blank">Financial Express</a>,<br /><br /><blockquote class="tr_bq"><h1>Column: Don’t kill the messenger, read the message</h1><div class="text">Varun Khandelwal <br /> <br />The government and RBI have taken several measures to check the depreciation of the rupee. Both have made several references to the non-deliverable forward (NDF) markets as a source of speculative activity against the rupee. <br /><br />NDFs are derivative contracts that do not require the delivery of the underlying asset. NDF markets exist for most emerging market currencies that are not freely convertible on the capital account. They allow market participants across the global to speculate freely, while remaining outside the purview of the regulatory structure of the country in question. <br /><br />A thriving NDF market exists for the rupee in Hong Kong, London, New York and Singapore. According to estimates by an NDF market maker, these markets trade about $5-7 billion daily. The onshore markets, derivatives and spot, used to trade approximately $4-6 billion. <br /><br />After RBI’s recent measures to curb speculation, the onshore volumes for the rupee have declined by about 50% to $2-3 billion. Effectively, the NDF markets are now responsible for about 60-70% of daily rupee trading from about 40-50% earlier. According to data from a December 2011 report by HSBC on emerging market currencies, the NDF markets had a share of only 20% in rupee trading. Clearly, offshore rupee volumes are on a rising trend. <br /><br />This is a pain point for RBI. RBI has a myriad of regulations on the convertibility and trading of the rupee in India. As the entities offering NDF products are offshore, RBI’s regulations and Indian laws such as the Foreign Exchange Management Act (FEMA) do not apply. <br /><br />Usually, the NDF forward prices trade 20-30 pips higher than onshore futures on the NSE. Further, the derivatives on the NSE trade at a premium to the interbank spot rates. The extent of this difference is determined by interest rate differentials and market liquidity conditions. This difference offers an arbitrage opportunity to entities that can trade both the markets. <br /><br />Multinationals, foreign banks, custodians, some domestic banks, large export houses, etc, which have presence both onshore and offshore, are able to arbitrage this difference by selling the NDF and buying the futures on the NSE or, in some cases, buying the spot itself. This regulatory arbitrage trade is preferably executed using derivatives as the cash outlay is lower and leverage can be used to enhance the returns. While there exist RBI regulations to deter this sort of regulatory arbitrage by offshore subsidiaries of Indian companies, these regulations are difficult to implement in practice due to limited scope of scrutiny of offshore companies by RBI. <br /><br />Instead, RBI has tried to crack down on this trading by sharply curbing domestic trading. The drastic reduction in permissible open interest on exchange traded derivatives has reduced the capacity of market participants to speculate on the rupee. It also limits the extent to which the NDF arbitrage can be carried out using the derivatives on the NSE since the domestic leg of the transaction cannot be carried out in large volumes. <br />Additionally, RBI raised the average daily CRR requirements, capped the liquidity under the Liquidity Adjustment Facility (LAF) and raised the spread between the Margin Standing Facility (MSF) rate and the repo rate from 100 bps to 300 bps, bringing the effective rate to 10.25%. Since RBI announced these measures, overnight call rates rose from 6-7% to about 10%, approximately the same as the MSF. Higher interest rates raise the opportunity cost of holding dollars instead of rupees. The monetary tightening created forced sellers of some domestic banks whose treasuries sold dollars to raise rupee liquidity which is now substantially more expensive and needed to fulfil stringent CRR requirements. These measures caused the rupee to appreciate by 2-3% for a short while before resuming its move down. <br /><br />The monetary tightening that resulted in temporary support to the rupee will prove very costly to the Indian economy. Overnight interest rates are higher by 400 bps, there is a severe liquidity crunch in the money markets, and the stock markets have fallen about 8%, with bank stocks correcting between 20-40%. This creates a very inhospitable investment climate in India. <br /><br />The reduced volume in the onshore market threatens to make the rupee more, not less, volatile. Further, these restrictions may move more rupee trading volumes offshore as market participants prefer that the rules of the marketplace are not changed to hurt them. This will move an ever larger fraction of the market outside of RBI’s jurisdiction, threatening to make the transmission of policy measures tougher. <br /><br />There are strong reasons why the rupee is not stabilising. India’s poor governance, declining growth, high current account deficit, and high fiscal deficit have made the rupee the currency of choice to bet against in the emerging markets basket. Additionally, the threat of reduction of quantitative easing in the US has put all emerging market currencies and bonds under stress. RBI’s own poor communication skills add to the problem. Statements about them being “concerned with exchange rate volatility, not rupee level” invite bets against the rupee as the implication is that the central bank does not care if the rupee goes to 61, 64 or 67! <br /><br />If the rupee is to be stabilised, RBI needs to communicate less often, and more effectively. Policy measures should be followed up with strong interventions in the FX markets. The central bank and the finance ministry should keep their disagreements private. The government is naive to expect the investment sentiment to improve in the face of slowing growth, looming elections, unimplemented liberalisation, inaction on industrial revival, and unbridled populism exemplified by the Food Security Bill. <br /><br />The NDF markets are outside RBI’s jurisdiction, and no manner of domestic restriction will diminish their existence. Markets are messengers of underlying problems, not the cause. If drastic measures are on the table, why not temporarily ban gold imports instead of murdering the economy? Pakistan just did. Probably a ban on gold will damage perceptions more for the ‘aam aadmi’ and some mumbo-jumbo in the credit and currency markets. <br /> The author is managing director, Bullero Capital, a Sebi-registered portfolio manager</div></blockquote>Varun Khandelwalnoreply@blogger.com0tag:blogger.com,1999:blog-3423996701597256548.post-42009008476376482162013-07-31T14:28:00.000+05:302013-08-05T15:12:14.816+05:30RBI's demolition of the Indian economy, in a futile, confused defence of the rupee<div dir="ltr" id="docs-internal-guid-2f0fdc49-4db2-aca7-0314-a52a060a5c2a" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;"><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline;"><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;">India faces an imminent macroeconomic crisis. The rupee has been rapidly depreciating, faster than most other emerging market currencies. A rapidly depreciating currency is unhealthy - foreign investors find it very risky to buy equity or debt in the face of significant currency risks. </span></span><br />&nbsp;</div><div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;"><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline;"><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;">Given the inelastic nature of India's import portfolio, and low elasticity exports to exchange rate depreciation, there is little hope of a meaningful improvement in the CAD. India&nbsp;is confronted with the reality of entering a death spiral where a depreciating rupee leads to a wider CAD which in turn fuels a further weaker rupee. </span></span></div><br /><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline;"><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;"></span></span><br /><div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;"><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline;"><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;">In the last fortnight, the RBI has taken several steps to support the rupee. It has raised the average daily CRR requirements to 99 per cent from 70 per cent during the fortnight. This effectively forces Indian banks to deposit approximate Rs 560 billion with the RBI to fulfill their statutory requirements. </span></span></div><br /><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline;"><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;"></span></span><br /><div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;"><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline;"><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;">Further, the RBI has capped the total amount of funds that an individual bank can repo at 7.25 per cent with the RBI at the Liquidity Adjustment Facility (LAF) window to 0.5 per cent of their Net Demand and Time Liabilities. This implies that the individual banks in shortage of liquidity to meet their now higher CRR can turn to the LAF only for limited relief. </span></span></div><br /><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline;"><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;"></span></span><br /><div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;"><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline;"><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;">The RBI also raised the spread between the Margin Standing Facility (MSF) rate and the repo rate effective for LAF form 100 bps to 300 bps, bringing the effective rate to 10.25 per cent. Banks, which ran into shortage of funds due to the higher CRR requirement, now have to borrow funds at 10.25 per cent from the MSF or from the overnight call money market. The RBI has achieved monetary tightening without raising the repo rates. Since the RBI announced these measures, overnight call rates from around 6 - 7 to about 10 per cent. Yield on the 10 year Government of India bond rose from 7.20 bps to about 8.5 bps. </span></span></div><br /><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline;"><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;"></span></span><br /><div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;"><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline;"><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;">Position limits in the domestic currency derivatives markets &nbsp;were also drastically reduced forcing many brokers to go into liquidation only mode for rupee trades for both clients and proprietary positions. The margin requirements for onshore currency futures was also doubled thereby reducing the leverage in the currency markets by half. As a consequence, onshore trading volumes fell by 50%.</span></span></div><br /><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline;"><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;"></span></span><br /><div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;"><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline;"><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;">Both these measures reduced the pressure on the rupee. The monetary tightening created forced sellers of some domestic banks while the substantially lower position limits curbed domestic speculation on the rupee. The rupee appreciated by 2 to 3 per cent and it seemed that the RBI was serious about defending the currency. It was an opportune situation for the RBI to aggressively intervene in the USD/INR markets; this would have created panic amongst deferred buyers of dollars such as importers, corporate hedgers, and potential debt investors waiting for the currency to stabilize. &nbsp;&nbsp;</span></span></div><br /><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline;"><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;"></span></span><br /><div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;"><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline;"><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;">These measures were also intended to target the offshore Non Deliverable Forwards (NDF) markets where the rupee forwards usually trade at a premium to the onshore markets. A very popular carry trade amongst particularly foreign banks and domestic banks with offshore trading operations was to sell the contracts in the offshore market and buy them cheaper onshore to earn an arbitrage profit. By reducing the position limits on the domestic exchanges and sapping domestic liquidity, RBI hoped to reduce the speculation on the NDF markets.</span></span></div><br /><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline;"><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;"></span></span><br /><div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;"><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline;"><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;">Unfortunately the RBI stopped short, and adopted a dovish tone. Subbarao reiterated that they are “concerned with exchange rate volatility, not rupee level”. Further, the central bank clarified they were “anxious to roll back liquidity tightening measures as anyone else but getting locked into a timeframe of rollback is not feasible due to the volatility in the forex market”. The rupee depreciated over 2 per cent in two trading sessions and came very close to its lows again. </span></span></div><br /><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline;"><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;"></span></span><br /><div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;"><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline;"><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;">There is an inherent contradiction in the RBI’s defense of the rupee. The RBI has been taking drastic steps to check the depreciation in the Rupee while maintaining that it is “targeting the volatility, not the levels” of the currency. Making such statements is a mistake. These leave the doors open to speculators to bet against the rupee as the implication is that the RBI does not care if the rupee goes to 60, 61, or 65! There is nothing that markets love more than an asset moving one way with low volatility. So speculators simply load in whenever the rupee appreciates a little. The RBI makes it an easy trade. </span></span></div><br /><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline;"><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;"></span></span><br /><div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;"><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline;"><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;">The economy will pay dearly for the monetary tightening in defence of the rupee. These measures came at a time when industry was looking to the RBI for relief, not higher rates. With the GDP growth already at the 5% handle, India simply cannot afford such cheap sacrifice of growth. Low growth begets weaker exchange rates. Depreciating rupee leads to higher fuel costs or subsidy bills, which by the RBI’s admission causes higher inflation. Higher inflation induces the RBI to keep interest rates high which continues to put downward pressure on growth. The cycle is vicious. </span></span></div><br /><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline;"><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;"></span></span><br /><div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;"><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline;"><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;">The present policy stance does precious little to promote currency stability. The RBI needs to decide whether it wants to defend the rupee or not. What it certainly should not do is make incessant, ineffective statements. </span></span></div><br /><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline;"><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;"></span></span><br />Varun Khandelwalnoreply@blogger.com0tag:blogger.com,1999:blog-3423996701597256548.post-86988173448105515892012-10-26T18:14:00.002+05:302012-10-26T18:14:30.271+05:30Errata: US 2012Q3 GDP number<span style="font-family: &quot;Helvetica Neue&quot;,Arial,Helvetica,sans-serif;">The third scenario was to be read as</span><br /><span style="font-family: &quot;Helvetica Neue&quot;,Arial,Helvetica,sans-serif;"></span><br /><ul><li><span style="font-family: &quot;Helvetica Neue&quot;,Arial,Helvetica,sans-serif;">Data positive, markets sell off <b>- </b><b><b>Opportunity to buy on decline</b> <b>with SL</b></b><br />Divergence between corporate profits and GDP growth. One will eventually track the other. In the case of a correction, it will offer an attractive entry point as the bearish scenario remains unproven and central bank liquidity continues to overwhelm. </span></li></ul><span style="font-family: &quot;Helvetica Neue&quot;,Arial,Helvetica,sans-serif;"><br />Disclaimer: Errata was published after the numbers' came out. </span>Varun Khandelwalnoreply@blogger.com0tag:blogger.com,1999:blog-3423996701597256548.post-56643651258536208442012-10-26T17:46:00.000+05:302012-10-26T17:47:54.472+05:30US 2012Q3 GDP number<span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;">The US 2013Q3 GDP numbers are expected in about 15 minutes. The consensus expectations are 1.9%. The market reaction to the numbers will be interesting and potentially a good indicator of whether to play long/short/flat.</span><br /><br /><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;">The rhetoric in the past was that markets shrug off all bad economic news as it potentially indicated higher probability of QE3 being delivered. Therefore, bad economic numbers was good for the market as it implied higher chance of the Fed providing liquidity to stimulate the economy which would, in turn, drive asset prices higher.&nbsp;</span><br /><br /><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;">The GDP numbers are the first major economic data point in the post-QE3 world. The following possibilities exist</span><br /><ul><li><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;">Data disappoints, markets sell off -&nbsp; <b>Opportunity to buy on decline</b> <b>with SL</b><br />This would indicate that the market looks at the present set of bad data as a confirmation of the poor earnings in the US. The recent sell off would be justified and would see another 2-3% downside to the markets before support levels are reached and bullish sentiment awakens again. Having already corrected, a degree of resilience will be built into the market. </span></li><li><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;">Data disappoints, market close firm/rally - <b>CAUTIOUS..play the momentum buy short at higher levels</b><br />This would indicate that the underlying sentiment continues to remain quite bullish and the markets will are actually in a 'buy-on-dips' zone where traders are looking to buy stocks in anticiptation of higher prices despite the poor earnings. Its a dangerous zone to be in. One should trade nimbly while watching downside risks very closely as markets could crash even at the smallest disappointment from leadership changes or changes in the situation in the Middle East. </span></li><li><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;">Data positive, markets sell off <b>- </b></span><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;"><b><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;"><b>Opportunity to buy on decline</b> <b>with SL</b></span></b><br />Divergence between corporate profits and GDP growth. One will eventually track the other. Given the presidential elections, Chinese leadership change, etc, it indicates that the markets are in a cautious zone and might correcti</span></li><li><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;">Data positive, markets rally<b> - BULLISH</b><br />In this scenario the markets are probably going to remain in an uptrend, recapture their recent high, and potentially make a newer high. The sentiment can change to one believing that QE3 is working. This can add 7% to 10% upside to the SPX. </span></li></ul><span style="font-family: &quot;Helvetica Neue&quot;, Arial, Helvetica, sans-serif;">Overall my view leans towards being cautiously bullish. The present bullish sentiment has not yet reached the state of euphoria that precedes significant market declines. I'd re-assess the SPX another 3-5% higher.&nbsp; </span><br /><br />Varun Khandelwalnoreply@blogger.com0tag:blogger.com,1999:blog-3423996701597256548.post-12784826506102326872012-06-14T02:09:00.003+05:302012-06-14T08:40:29.515+05:30'Grexit' next week? Probably Not.<span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><span id="internal-source-marker_0.3220219253562391"><span style="font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The most common debate doing rounds in the financial circles this week is whether or not Greece will be a part of the Eurozone a month from today? The prevailing view amongst macroeconomic observers is that Greece would exit the Eurozone eventually; the debate centres around whether the exit will be orderly or disorderly. The present conditions will not precipitate a Grexit. A Grexit cannot be orderly for Greece. It can be orderly for the EU, and indeed might be instigated by the EU, if a mechanism to stabilize the financial system can be agreed upon. Greece will initiate a move towards exiting the Eurozone only in circumstances resembling a revolution effecting a regime change. The present policy will be to award limited concessions to Greece. The focus will be on preventing the locking out of Spain and Italy from the bond markets. These are the most imminent risks to the future of the Eurozone. </span></span></span><br /><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><span style="font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"><br /></span></span><br /><span id="internal-source-marker_0.3220219253562391"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><span id="internal-source-marker_0.3220219253562391"><span style="font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The outcome of the Greek elections on June 17 is expected to be critical to the fate of Greece. The New Democracy is the market favourite as they intend to honour the existing bailout agreement while requesting for concessions in the existing terms. An extremely uncertain situation will emerge if the Syriza party wins the majority - they are openly critical of the existing bailout agreement and potentially intend to challenge, not request, the EU to ameliorate the terms of the bailout. The possibility also exists that the elections might be inconclusive like last time which would also leave market participants quite anxious. Whatever be the outcome of the Greek elections, there is very low support in Greece for abandoning the Euro or leaving the EU.&nbsp;</span></span></span><br /><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><span style="font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"><br /></span><span style="font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The Greeks stand to lose a great deal from leaving the Euro. Their banking system will almost certainly collapse unless the exit is confidentially and immaculately planned with capital controls and withdrawal restrictions on existing Euro denominated bank deposits. Recent events makes it abundantly clear that the politicians in Greece, and elsewhere, are incapable of such planning. Further, a departure from the Euro will leave existing Greeks poorer by the 20% to 50% devaluation implied by the introduction of a new Drachma. This tantamounts to expropriation of wealth by the Greek state from the people of Greece - an unnecessary step unless the level of crisis escalates significantly.&nbsp;</span></span><br /><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><span style="font-size: 15px; white-space: pre-wrap;"><br /></span><span style="font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Further, an exit will cause the exclusion of Greece from international trade, tourism and international capital flows. The institution that normally step in to help a country after such a crisis, the IMF, is already fully engaged in Greece. Any exit from the Eurozone cannot be orderly for Greece; it will almost certainly lead to a strong negative economic shock.</span></span><br /><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><span style="font-size: 15px; white-space: pre-wrap;"><br /></span><span style="font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The EU maintains that they will not negotiate or relax the terms of the bailout agreed to by Greece in the past. However, this seems like political posturing as EU has not denied the next bailout tranche though it is evident that Greece has not met completely its target for economic reforms and restructuring. The Greek bargaining position is further strengthened by the generous terms of the recent Spanish bailout.&nbsp;</span></span><br /><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><span style="font-size: 15px; white-space: pre-wrap;"><br /></span><span style="font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The EU will continue to indulge the Greeks and their demands as they have been unable to agree on a mechanism to prevent contagion from a Greek exit. An uncontrolled ‘Grexit’ would lock out Spain, and possibly Italy, from financial markets leaving the core countries, led by Germany, to foot the bill. This is precisely the situation that Merkel wants to avoid at all costs. However, once Germany is able to agree to a mechanism ensuring financial stability for ‘core’ and large economies like Italty and Spain, the PIIGS may be left to fend for themselves and a zero-tolerance policy may be adopted towards awarding further concessions.&nbsp;</span></span><br /><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><span style="font-size: 15px; white-space: pre-wrap;"><br /></span><span style="font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">News flow from the Eurozone will continue to remain exciting with Greece being slowly overshadowed by Spain and Italy. There will be no exits from the Eurozone leading up to the summit at the end of June. The summit will probably fail in its objective of developing a mechanism for insuring the stability of the financial system in Europe. Instead of a concrete plan like the TARP in the US, the summit will conclude with promises of a commitment towards a resolution. In the meanwhile, the ECB will continue to provide liquidity to the banking system in Europe to keep it on life support. Credit markets will continue to remain frozen and GDP growth numbers will be negative for the Eurozone. We will continue to see phases of risk ‘on’ and ‘off’ in the markets depending on news flow from Europe.</span></span><br /><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><span style="font-size: 15px; white-space: pre-wrap;"><br /></span><span style="font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The current policy of postponing the problem and spreading the losses over time might work. However, it is a dangerous policy with high chances of a sudden implosion. Bank runs have the tendency to work in jump functions - sentiment changes from a quiet mistrust leading to a sudden failure of a large number of institutions. Europe has not yet demonstrated the ability to competently deal with such exigencies. Deteriorating economic conditions, continued political unrest, an unstable government, high rates of youth unemployment are signs that often precede revolutions. Some of these can already be seen in Greece.&nbsp;</span></span><br /><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><span style="font-size: 15px; white-space: pre-wrap;"><br /></span><span style="vertical-align: baseline;"><span style="font-size: 15px; white-space: pre-wrap;">The current mercantilist structure with Germany exporting goods to a periphery of less efficient economies is unsustainable without German support for the peripheral economies to the tune of 2 to 3 trillion euros either via joint-euro bonds, ECB monetization of debt, or other joint contingent liability mechanisms. Economic history has several examples where mercantilist exporters finance their exports by lending money to the importing nation. Germany need only look east towards China who is the largest holder of US debt today. Without this understanding in the German political establishment, political disagreements between the ‘core’ and the ‘periphery’ will eventually lead to the disintegration of the Eurozone and the potential shutting out of Germany from several European markets. In either case, the economic outlook for the Eurozone is negative and has potentially severe consequences for Asia.</span></span></span></span>Varun Khandelwalnoreply@blogger.com0tag:blogger.com,1999:blog-3423996701597256548.post-63643878674328353722012-03-14T11:54:00.001+05:302012-03-14T12:07:40.351+05:30Budget Trade Idea: Long Rate Sensitives Short TATA MotorsGoing long banks and short autos might be a very interesting idea in view of the potential policy announcements over the next few days. Here's what may happen over the next few days<br /><br /><ul><li>Thursday - monetary policy announcement will have a symmetric impact on banks and autos</li><li>Friday - union budget is unlikely to give out sops to either autos or banking. However, there is a strong possibility of a fuel price hike and rationalization of diesel pricing in India.</li><ul><li>Fuel price hike will not affect auto stocks too much since its will a one off event</li><li>Diesel price rationalization will kill auto stocks with a tilt towards diesel - i.e. Tata Motors which wholly concentrates on diesel vehicles in both&nbsp;commercial&nbsp;and passenger segments. Other stocks will be hit as well but not to the extent Tata Motors will be.&nbsp;</li></ul><li>In case there is diesel price rationalization, Tata Motors can deliver up to 10% underperformance vis-a-vis other rate sensitives</li></ul><div>My bet, Long SBIN short TATA Motors</div>Varun Khandelwalnoreply@blogger.com0tag:blogger.com,1999:blog-3423996701597256548.post-34148692632177131342012-03-14T10:42:00.001+05:302012-03-14T12:08:40.201+05:30Crystal Ball Gazing: adrenaline rush; remain LongI've been meaning to write an elaborate post on the budget, monetary policy, politics, etc, for the last 10 days but just haven't had the time. Quickly summarizing what I am thinking in no particular order -<br /><br /><ul><li>Union Budget will be reformist.&nbsp;</li><ul><li>Power sector will receive attention - SEB finances and coal policy rationalization</li><li>Fuel prices will be hiked to manage finances... and this can add to reforms</li><li>FDI in retail will most probably not be put forward - politically unpalatable. Mamta and Akhilesh will never agree</li><li>Infra and roads will receive thrust&nbsp;</li><li>Education and health will get focus especially in tier II and tier III cities</li><li>Fiscal deficit will not be cut - there is no benefit to the Government right now. Think of the electorate and the Government as growth junkies.. Fiscal deficit is probably going to be the concern for the next Government when they put the economy in 'rehab'</li></ul><li>Monetary policy</li><ul><li>Inflation - noises to the effect that inflation is cooling off but risks remain on account of potential rise in energy prices</li><li>Growth concerns will be voices in the policy statement</li><li>Monetary easing almost certain&nbsp;</li><ul><li>40% chance - rate cut of 25bps&nbsp;</li><li>30% chance - rate cut of 25bps plus some relaxation in SLR</li><li>20% chance - rate cut of 50bps</li><li>10% chance - no easing but dovish noises</li></ul></ul><li>Politics</li><ul><li>SP will form an alliance with the Congress at the Centre. Direct support, outside support, whatever, doesn't matter. Mulayam will probably get a Union Cabinet post.</li><li>Mamta and Congress will patch up a wee bit more. The Congress will&nbsp;accommodate&nbsp;her more, leave Bengal to its miserable state and stay away from FDI in retail which will not go down well with electorates in both UP and Bengal so it will be hard to get political support for this.</li><li>The Congress will try to push through popular reforms like roads, infra, etc which will get the growth momentum rolling. It will stay away from FDI.</li></ul></ul>Varun Khandelwalnoreply@blogger.com0tag:blogger.com,1999:blog-3423996701597256548.post-29356494070696338822012-03-09T15:50:00.000+05:302012-03-09T15:51:48.449+05:30Budget Trade Idea: buy NTPC (Rs. 173.8)Ideally the post with my views on the budget should come before this but I couldn't wait long.<br /><br />To my mind, NTPC presents an asymmetric payoff matrix centered around the budget. Lets go through this step-wise:<br /><br /><ul><li>NTPC is an uneventful thermal power company primarily relying on coal to generate power which it sells to state electricity boards. Its owned and is under the control of the Government of India for all practical purposes.&nbsp;</li><li>Problems faced by NTPC (and other power producers as well)</li><ul><li>State Electricity Boards (SEBs) in India, NTPC's primary customers, are essentially bankrupt and do not make payments on time.</li><li>The Government is very confused about its policy on coal which creates complications for producers</li></ul><li>There are two&nbsp;possibilities&nbsp;with the budget</li><ul><li>The government chooses to present a populist budget which does not augur well for the economy, power produces, and, in this instance, for NTPC. <br />The people of India might cheer it on but when they feel the pangs of slowing growth 12 to 15 months down the line towards the end of 2013, they will not reward the government in the 2014 general elections. The people of India want a performance oriented, not a promise oriented, government - this is clear from elections over the last 3 - 4 years.</li><li>The government chooses to reform. Even if they do nothing on the issue of power sector reforms, any inkling of reform will be enough to boost sentiments to the point where market participants become bullish on the power sector. In this case, power producers should benefit.</li></ul><li>Why NTPC?</li><ul><li>The above analysis assumes rationality on the part of the Congress. Their actions over the last one year have been anything but rational / sensible.&nbsp;</li><li>NTPC presents an asymmetric payoff structure due its limited downside potential. Downside in NTPC is limited - my reasons are dominantly technical supported by the fundamentals of the company. I do not think this asymmetric payoff structure applies to private power companies due to their unproved execution skills and weaker balance sheets.</li></ul></ul><div><br /></div><div>The trade can be structured by going long NTPC March contract. Another way to structure it is by going short 160PE and long 180CE. Personally, I would go for a combination of the two depending on risk appetite.&nbsp;</div>Varun Khandelwalnoreply@blogger.com0tag:blogger.com,1999:blog-3423996701597256548.post-22042788981468340782012-01-20T18:00:00.000+05:302012-01-20T18:00:43.584+05:30algo/systematic trading in IndiaPeople in India are aggressively getting into system based trading with algo trading driving about 40% to 50% of the trading volume on the NSE. From order-book data and changing performance of different strategies over the last five years, I think the following quant strategies have big money running on them in India -<br /><br /><ul><li>Momentum and Reversion portfolios based on ranking alpha factors - this is still in its earlier stages with simpler factors being used</li><li>Pairs trading using Bollinger Bands and 2 sigma test. Many players have started to use co-integration instead of correlation</li><li>Some basic use of ARCH/GARCH models in the options space</li><li>Volatility arbitrage.. with poor gamma management</li><li>Order-book balancing&nbsp;</li><li>Automated standard technical trading systems</li><li>All manner of arbitrage strategies</li></ul><div>This isn't a comprehensive list.&nbsp;</div>Varun Khandelwalnoreply@blogger.com1tag:blogger.com,1999:blog-3423996701597256548.post-47973331510297041392012-01-09T12:49:00.000+05:302012-01-09T13:33:56.127+05:30Subbarao hints at easier policy. Why did markets not rally?The RBI Governor, D Subbaroa, hinted at an easier monetary policy (<a href="http://articles.economictimes.indiatimes.com/2012-01-02/news/30587439_1_monetary-policy-tame-inflation-growth-and-inflation">see ET article on 6th Jan</a>). The rate cycle turning will be positive for the economy and markets. Why did the markets not rally then? I think stagnancy in the markets is related to uncertainty about the date of rate cuts compounded by the risks posed by the earnings season.<br /><br />The state of public finances is not exactly where the government wants, or the market expected. The government has overshot its fiscal targets and agencies like NHAI are making large bond offerings with more paper expected down the line. The prevailing sentiment is that the markets will not be able to absorb so much lending at lower rates and that the RBI, as the <i>de facto </i>debt management office of the government, will try to auction G-sec first and cut rates later. Essentially, this implies that rate cuts will not happen on the Jan 24 meeting but at some date after that.<br /><br />To add to uncertainty related to the date of a rate cut, there are quite a few corporate earnings which will be announced in the two weeks leading up to the monetary policy meeting on the Jan 24. There is a fair degree of unease in the markets about corporate profits, bank asset quality, order book growth in infrastructure, regulation and scam in telecom, etc.<br /><br />If you buy the markets today, and there are negative shocks to earnings between now and the policy, you don't really make any money. If the policy is good, you simply recover the intermediate loss. If they do not ease, well, then you lose some more. The compounded probability makes buying the market an unattractive proposition for risk averse traders.<br /><br />Chances of a negative surprises for the dominant part of the NIFTY are low.&nbsp;The sectors with the highest weights in the NIFTY - financials (26%), energy and related (15%), pharmaceuticals (4%), software (14%), infra related (more than 5%) - have a small chance of further negative surprises with expectations already being very low, though IT can be complicated with the impact of the rupee still not known clearly.&nbsp;I think that there are low chances that the rate cuts will be deferred beyond the Jan 24 meeting - there is too much at risk for the government and the economy to be stupid about monetary policy any further.<br /><br />This is a time to go long without leverage on quality large cap stocks which are oversold. Public sector financials and infrastructure stocks like Larsen and BHEL look good. Select midcaps like Biocon look very attractive as well.Varun Khandelwalnoreply@blogger.com0tag:blogger.com,1999:blog-3423996701597256548.post-87245204628333166242011-12-29T18:52:00.000+05:302011-12-30T11:33:59.533+05:30Crystal Ball Gazing: Bullish for Jan-Feb 20122011 has certainly been an exciting year for most investors and traders. Exciting and painful thanks to the vacillating political and policy response to the sovereign debt crisis in the Eurozone, continuously deteriorating conditions in the shadow banking system and increased perception of systemic risk in the international financial system. The NIFTY has declined approximate 24% in rupee terms and approximately 43% in dollar terms!<br /><br />This article is really focused on the next 30 to 45 days rather than a longer period. <b>My view for the Jan-Feb 2012 period is unequivocally bullish on Indian equities</b>. An important qualification - I am not making any claims for the next three, six or twelve months; just a short term view. A longer term view is reserved for another article.<br /><br /><span style="font-size: large;"><i>Banks aren't going to fail</i></span><br /><br />Globally, the macroeconomic news flow and data should hold ground over the next 4 to 6 weeks. No major financial institution is going to blow up in either Europe or America. Unlimited money is needed to prevent a systemic collapse and the actions of central banks around the world show that they are willing to provide exactly this.<br /><br />The Fed has been printing money for quite some time with its balance sheet, with the exact figure&nbsp;<a href="http://www.bloomberg.com/news/2011-12-06/bloomberg-news-responds-to-bernanke-criticism.html">debatable</a>, certainly is in excess of $3 trillion. The Swiss National Bank has <a href="http://www.zerohedge.com/news/currency-peg-causes-50-surge-swiss-national-bank-balance-sheet-major-fx-losses">expanded its balance sheet</a> and the Bank of Japan is a seasoned&nbsp;monetizer.&nbsp;The ECB, while making very all noises to the contrary, has printed even more aggressively and is already&nbsp;<a href="http://www.bloomberg.com/news/2011-12-28/asian-stocks-fall-copper-snaps-four-day-rally-on-europe-growth-concerns.html">over $3.5 trillion</a>.<br /><br /><i><span style="font-size: large;">The Euro isn't breaking up</span></i><br /><br />&nbsp;The Europeans are not going to let the Euro fail or change in the near term - much more civil and political unrest is needed for the shape of the EMU to change. Germany needs the Euro&nbsp;desperately&nbsp;to grow, banks in France and Austria have retail exposure to peripheral economies. Greece, Italy, Portugal, everyone needs the single market for their economies to survive. The integration is far too deep and intricate for politicians to simply pull the chord.<br /><br />Too much damage will happen if the progression of events is allowed to become discontinuous in the current situation. The fate of Europe has not been decided, and perhaps rightly so. What is needed in the present is perhaps exactly the can-kicking which is happening since the pain from cutting debt sharply is not politically palatable or feasible.<br /><br />The final outcome for the Euro will be a function of civil and political opinions which will change over time and no single decision making collective has control over this process. To assume that the problem can be simply 'fixed' is naive - it will find its own dialectic eventuality.<br /><br /><i><span style="font-size: large;">India: Rate Easing Begins</span></i><br /><br />The Reserve Bank of India is amongst the most hawkish central banks in the world today. Perhaps also one of the few central banks who are&nbsp;presumptuous enough to&nbsp;believe that domestic monetary policy in an economy the size of India can influence imported inflation. Few central banks believe that food inflation in a developing economy, where large sections of population are malnourished or at subsistence levels, can be influenced by raising interest rates. The RBI is one of them.<br /><br />Recent data shows inflation levels have started tapering off, especially food inflation. While growth is weak globally, the industrial production data in India has been abysmal thanks to RBI's aggressive tightening. Recent RBI policy statements show that the RBI is concerned about growth, but not at the cost of inflation.<br /><br />Since inflation and growth both are headed down in India, the RBI ought to adhere to its economic ideology, and probably will ease in January 2012 marking the peak of the interest rate cycle - a huge positive of equities.<br /><br /><br /><i><span style="font-size: large;">India: Political Cycle Potentially Turning</span></i><br /><br />The political cycle in India shows the potential for turning if the Congress&nbsp;maneuvers deftly and uses the recent failure of the Anna Hazare led protest for the Lokpal anti-graft legislation.&nbsp;If the Congress plays its cards correctly over the next two months, it can fatally cripple the Anna Hazare led movement and disable the opposition which has not been the smartest political opponent this year with its own internal problems.<br /><br />The public debate in 2011 has not been about poverty or growth or economic management; its been singularly focused on corruption charges against the Government. The Congress has the opportunity to capitalize on the present weakness in the protest movement, coupled with the convenience of the Parliament not being in session, to take executive decisions which can improve business confidence. This followed up with a reasonable Union Budget in March can turn things around very quickly.<br /><br />While measures will take time to roll out, we feel that there is more than even chance that the Congress will take decisive steps in January can set the desperately required policy momentum rolling.<br /><br /><i><span style="font-size: large;">India: cheap valuations and potential near term triggers</span></i><br /><br />Market valuations are on the cheaper side of historical bands in India. The prevailing mood does not assume that interest rates will start falling in January or that the political process has the potential to turn around before the UP elections in the summer. My bullish hypothesis rests on positive surprise on the policy front, positive potential on the political front, cheap rupee, cheap stock market valuations and exaggerated short-term pessimism on the global scenario where nothing decisive, positive or negative, will happen in the next quarter. The NIFTY can rally to levels between 5200 and 5500 while the rupee should not depreciate further.<br /><br /><br /><br />Varun Khandelwalnoreply@blogger.com0tag:blogger.com,1999:blog-3423996701597256548.post-52351646955822995122011-12-28T13:33:00.000+05:302011-12-28T13:33:03.724+05:30blog revived from Jan 2012Hello,<br /><br />I could not post for the last 12-14 months&nbsp;due to a few personal and professional reasons . This blog restarts from Jan 2012 in its new avatar with a focus on international and Indian markets. The idea is to analyse policies, politics, economics, anything that can have a bearing on managing money domiciled in India while keeping an international perspective in mind.<br /><br />Hope you enjoy reading it..<br /><br />Varun.Varun Khandelwalnoreply@blogger.com0tag:blogger.com,1999:blog-3423996701597256548.post-38260606907292426932010-08-16T11:24:00.002+05:302010-08-16T11:35:38.268+05:30Cairn / Cride.. stopped out.Vedanta Resource's purchase of 51% stake in Cairn India led to sharp upside in the price of Cairn. We're stopped out at a loss of 7% to 8% .. will re-initiate the pair again at a later point of time..Varun Khandelwalnoreply@blogger.com0tag:blogger.com,1999:blog-3423996701597256548.post-16304347730972069792010-08-10T12:40:00.007+05:302010-08-10T16:51:28.295+05:30Trade - Short Cairn India (CAIRN), Long CRUDE (CL1 or CRUDEOIL)<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://3.bp.blogspot.com/_McXVfbEFTuo/TGD8LeQPZrI/AAAAAAAACUw/Z8EMJouJjiY/s1600/snapshot-3.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 480px; height: 172px;" src="http://3.bp.blogspot.com/_McXVfbEFTuo/TGD8LeQPZrI/AAAAAAAACUw/Z8EMJouJjiY/s400/snapshot-3.png" border="0" alt="" id="BLOGGER_PHOTO_ID_5503676018676688562" /></a><br /><div>Cairn India is a crude producer in India with stakes in oil fields in Rajasthan. 95% of Cairn's valuations are attributed to the PDV of the future value of its crude oil inventories. Therefore, Cairn's valuation can be attributed to three main factors:</div><div><ol><li>Price of Crude</li><li>Quantity of crude in the oil fields</li><li>Cairn's ability to successfully extract and sell the crude</li></ol><div>I got into a Long Crude Oil (3816 Sept 10 MCX) , Short Cairn India (343 Aug 10 NSE)...with an anticipation of 6% yield based on my model. The first factor is hedged. The second factor is known.. and the third factor can only have downside risk. Finally, crude faces upside risk due to compelling geopolitical factors based on Israel-Iran interactions and this may lead to an <b><i>exceptional</i><span class="Apple-style-span" style="font-weight: normal;"> pay off beyond the expected 6%</span></b>.</div><div><br /></div><div>Hope this works well.. </div></div>Varun Khandelwalnoreply@blogger.com1tag:blogger.com,1999:blog-3423996701597256548.post-46621862224085039682010-07-08T10:12:00.004+05:302010-07-08T16:29:15.913+05:30The Big guys love the small ones.. !There's been a lot of talk of M&amp;A in the Indian banking sector recently. Just today the Mint came out with an <a href="http://www.livemint.com/2010/07/07233201/MampA-deals-brewing-in-banki.html?h=A1">article</a> stating that larger private sector banks in India are considering purchase of smaller banks.<br /><br />Essentially the trade idea is to go long small banks with a view that they'll get sold at 4x book..most of them are currently trading at 1-2x book. simultaneously, one can short larger pvt sector banks which are trading between 3-4x book.. The trade should yield between 33% to 100% depending on basket selection..<br /><br />The main problem with the trade is timing. There is a great deal of uncertainty over when the merger activity in the pvt banking space will expedite. That will determine the annualized yield on the trade.<br /><br />I'm going to be analyzing this trade in detail over the next week or so.. and am looking to put it on my account depending on the results..Varun Khandelwalnoreply@blogger.com1tag:blogger.com,1999:blog-3423996701597256548.post-4093625176417631812010-06-25T12:19:00.001+05:302010-06-25T12:19:46.952+05:30NIFTY Valuations…<p>I was recently looking at NIFTY valuations as defined by PE, PB and Dividend Yields.. </p> <a href="http://lh5.ggpht.com/_McXVfbEFTuo/TCRRWtAOrjI/AAAAAAAACTk/WK7qPlAEH7A/s1600-h/image%5B3%5D.png"><img style="border-right-width: 0px; display: inline; border-top-width: 0px; border-bottom-width: 0px; border-left-width: 0px" title="image" border="0" alt="image" src="http://lh6.ggpht.com/_McXVfbEFTuo/TCRRX3s2rpI/AAAAAAAACTo/w8BS-V5AunI/image_thumb%5B1%5D.png?imgmax=800" width="550" height="433" /></a> <p><a href="http://lh4.ggpht.com/_McXVfbEFTuo/TCRRYyaMaUI/AAAAAAAACTs/gZyW2ab1iXs/s1600-h/image%5B6%5D.png"><img style="border-right-width: 0px; display: inline; border-top-width: 0px; border-bottom-width: 0px; border-left-width: 0px" title="image" border="0" alt="image" src="http://lh5.ggpht.com/_McXVfbEFTuo/TCRRaFncGQI/AAAAAAAACTw/JM19D9IOI40/image_thumb%5B2%5D.png?imgmax=800" width="244" height="144" /></a>&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; <a href="http://lh5.ggpht.com/_McXVfbEFTuo/TCRRbElofKI/AAAAAAAACT0/gPZhXycnd1Y/s1600-h/image%5B9%5D.png"><img style="border-right-width: 0px; display: inline; border-top-width: 0px; border-bottom-width: 0px; border-left-width: 0px" title="image" border="0" alt="image" src="http://lh5.ggpht.com/_McXVfbEFTuo/TCRRbyN9oAI/AAAAAAAACT4/zs5egO8_2Lk/image_thumb%5B3%5D.png?imgmax=800" width="244" height="146" /></a> </p> <p>On a PE basis, 24 seems to be the upper band since late 2009.. from the current levels, that<em> </em>indicates a potential 10% upside before serious valuation based selling pressure emerges.</p> <p>Since 1999, the PE high preceding both the dot-come and the sub-prime crashes was around 28.. and the PE low in the 10-12 zone.. </p> <p><a href="http://lh5.ggpht.com/_McXVfbEFTuo/TCRRdsuagmI/AAAAAAAACT8/BRB8NEMryao/s1600-h/image%5B20%5D.png"><img style="border-right-width: 0px; display: inline; border-top-width: 0px; border-bottom-width: 0px; border-left-width: 0px" title="image" border="0" alt="image" src="http://lh3.ggpht.com/_McXVfbEFTuo/TCRRerr4DbI/AAAAAAAACUA/ozmV1xKyoA8/image_thumb%5B8%5D.png?imgmax=800" width="554" height="303" /></a></p> <p>&#160;<a href="http://lh4.ggpht.com/_McXVfbEFTuo/TCRRfkstlCI/AAAAAAAACUE/sK6_sHMDD2E/s1600-h/image%5B15%5D.png"><img style="border-right-width: 0px; display: inline; border-top-width: 0px; border-bottom-width: 0px; border-left-width: 0px" title="image" border="0" alt="image" src="http://lh5.ggpht.com/_McXVfbEFTuo/TCRRgvFmy0I/AAAAAAAACUI/2m7EQg4PGio/image_thumb%5B5%5D.png?imgmax=800" width="244" height="144" /></a>&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; <a href="http://lh6.ggpht.com/_McXVfbEFTuo/TCRRhbVweGI/AAAAAAAACUM/3Abw3Y34ebw/s1600-h/image%5B18%5D.png"><img style="border-right-width: 0px; display: inline; border-top-width: 0px; border-bottom-width: 0px; border-left-width: 0px" title="image" border="0" alt="image" src="http://lh3.ggpht.com/_McXVfbEFTuo/TCRRifi911I/AAAAAAAACUQ/-Si8rjR54hg/image_thumb%5B6%5D.png?imgmax=800" width="244" height="146" /></a> </p> <p>Data from NSE</p> <div style="padding-bottom: 0px; margin: 0px; padding-left: 0px; padding-right: 0px; display: inline; float: none; padding-top: 0px" id="scid:0767317B-992E-4b12-91E0-4F059A8CECA8:0404abce-9999-44f8-8fa7-5b6fad84fba7" class="wlWriterEditableSmartContent">Technorati Tags: <a href="http://technorati.com/tags/NSE" rel="tag">NSE</a>,<a href="http://technorati.com/tags/NIFTY" rel="tag">NIFTY</a>,<a href="http://technorati.com/tags/PE" rel="tag">PE</a>,<a href="http://technorati.com/tags/Valuation" rel="tag">Valuation</a>,<a href="http://technorati.com/tags/Indian+Markets" rel="tag">Indian Markets</a></div> Varun Khandelwalnoreply@blogger.com0tag:blogger.com,1999:blog-3423996701597256548.post-18749065625992801872010-06-04T11:13:00.005+05:302010-06-04T11:20:30.956+05:30Euro update !<a href="http://2.bp.blogspot.com/_McXVfbEFTuo/TAiTQ8xks_I/AAAAAAAACTE/jjnGf2-oDv8/s1600/%24EURUSD+(5+Min)++6_4_2010.jpg"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 223px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5478790866097452018" border="0" alt="" src="http://2.bp.blogspot.com/_McXVfbEFTuo/TAiTQ8xks_I/AAAAAAAACTE/jjnGf2-oDv8/s400/%24EURUSD+(5+Min)++6_4_2010.jpg" /></a><br /><div>The Euro's been one hell of an instrument to trade ! Yesterday's weakness was a result of negative comments coming out of Eastern European economies.. esp Hungary. News has it that the IMF steering committee head indicated that the IMF is underfunded compared to its bailout commitments.. and senior IMF officails are 'unofficially' visiting Hungary..</div><div></div><br /><div>Euro has been taking support at 1.2150 for quite some time.. a decisive move below 1.2150 on EURUSD, 110 on EURJPY and above 1.42 against the CHF will indicate crisis part II is beginning.. untill then, we're in no man's land. One can speculate (as indeed I am inclined to) that the levels will break, but when is anybody's guess. Further, a sharp sell-off in risk assets will happen only if the breakdown is a step function (as opposed to an orderly decline that the ECB might want to see).</div>Varun Khandelwalnoreply@blogger.com0tag:blogger.com,1999:blog-3423996701597256548.post-31533293232681129132010-05-27T20:59:00.001+05:302010-05-27T21:01:14.200+05:30Bill Gross on Rating Agencies !<div>Excerpt from a very interesting article by Bill Gross of PIMCO on rating agencies...</div><div><br /></div><div><span class="Apple-style-span" style="font-family: Arial, Helvetica, Verdana, sans-serif; font-size: 12px; "><p></p><blockquote><p>Firms such as PIMCO with large credit staffs of their own can bypass, anticipate and front run all three, benefiting from their timidity and lack of common sense. Take these recent examples for instance: S&amp;P just this past week downgraded Spain “<u>one notch</u>” to AA from AA+, cautioning that they could face another downgrade if they weren’t careful. Oooh – so tough! And believe it or not, Moody’s and Fitch still have them as AAAs. Here’s a country with 20% unemployment, a recent current account deficit of 10%, that has defaulted 13 times in the past two centuries, whose bonds are already trading at Baa levels, and whose fate is increasingly dependent on the kindness of the EU and IMF to bail them out. Some AAA!</p><p></p><p>Now let’s go the other way. GMAC, that only too recently near-bankrupt finance company, carries recently<u>upgraded</u> B ratings from the rating services. Profiles in courage for all three, I say! I mean the U.S. government has injected $20 billion of capital and owns 65% of the company. It’s the auto industry’s equivalent of FNMA and FHLMC, except those are AAA and GMAC is B with a “positive outlook!” For that, you can buy a GMAC two-year bond at 6½% (8% with what are called “smart notes” that <i>Investment Outlook</i>readers can buy through their broker), while you receive only 1.2% at Fannie and Freddie. Vive la différence!</p></blockquote><p></p></span></div><div><br /></div><div><blockquote></blockquote><br /></div>Varun Khandelwalnoreply@blogger.com0tag:blogger.com,1999:blog-3423996701597256548.post-18264601265001582502010-05-24T21:19:00.005+05:302010-05-24T21:29:36.224+05:30Euro creeps up again...<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://3.bp.blogspot.com/_McXVfbEFTuo/S_qgph90wtI/AAAAAAAACS8/Ik21L6I1bl4/s1600/Euro+Intraday.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 300px;" src="http://3.bp.blogspot.com/_McXVfbEFTuo/S_qgph90wtI/AAAAAAAACS8/Ik21L6I1bl4/s400/Euro+Intraday.png" border="0" alt="" id="BLOGGER_PHOTO_ID_5474864932375020242" /></a><br /><div><br /></div><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://1.bp.blogspot.com/_McXVfbEFTuo/S_qgNn7m6iI/AAAAAAAACS0/l-3MAsV01l0/s1600/Euro+Intraday.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 300px;" src="http://1.bp.blogspot.com/_McXVfbEFTuo/S_qgNn7m6iI/AAAAAAAACS0/l-3MAsV01l0/s400/Euro+Intraday.png" border="0" alt="" id="BLOGGER_PHOTO_ID_5474864452939999778" /></a><br /><div>After a vicious sell-off following the Spanish bank failure, the Euro has begun to recover. If this is intervention, then the Central Bank dealers have changed their tactics.. no more 100pip 'shock and awe' moves. However, the risk to the Eurozone remains. </div><div>The Swiss National Bank has been intervening in the EUR-CHF markets aggressively.. read<a href="http://ftalphaville.ft.com/blog/2010/05/21/239446/the-swiss-franc-defence-cost-a-billion-a-day-in-april/"> post on FT Alphaville</a>.</div><div>Real Estate in Spain has been a pain for some time to come. This can be the next damper in the Euro saga.. Watch out for news events linked to Spain.</div>Varun Khandelwalnoreply@blogger.com0tag:blogger.com,1999:blog-3423996701597256548.post-45705079549159078772010-05-24T21:12:00.003+05:302010-05-24T21:17:15.887+05:30RNRL vs Reliance? a 50% trade? - Update IIIHo boy.. lucky that we got out of the trade while RNRL was still at 45.. Mukesh and Anil Ambani patched up. Now this is interesting if you think about it.. How exactly does this help RNRL.. They were getting gas at $4.2..which they still are.. nothing else changes. RCom can now hug and be merry with MTN now; but that should take the market cap <i>down</i> not up if Bharti-Zain is anything to go by.. <div><br /></div><div>This is a mere sentiment booster.. I think RNRL's longer term valuation still should remain at 30 to 40 levels.. Don't buy.. Shorting an ADAG stock is not a feat for the faint hearted.. and anyway, the quick trading move is over as discussed in my<a href="http://www.varunkhandelwal.com/2010/05/rnrl-vs-reliance-50-trade-update-ii.html"> last post</a>. </div><div><br /></div><div>RelInfra and Relcap (esp RelCap which is a steal at 650 levels) are good buys from the ADAG group at current prices..</div>Varun Khandelwalnoreply@blogger.com0tag:blogger.com,1999:blog-3423996701597256548.post-44614079385894215622010-05-24T14:57:00.003+05:302010-05-24T15:06:26.035+05:30Update: Long Equity/Short Gold.. Doubts creep in..Just a few days back I had recommended a long equity/short gold strategy .. I'd like to revisit that stance.. We've made between 1% to 3% on that trade.. gold was at 1200-1220 levels .. and the SP500 was slightly lower.. <div><br /></div><div>I'd take the money off the table at this point.. The new trade's a long bull spread with Long 1x 2% OTM calls and Short 1.5X 5% OTM calls.. A naked futures position is not warranted at this point given the global market situation. </div><div><br /></div><div>My expectation is that we'll move lower from here.. but the risk/reward is clearly in favor of a long equity position at this point. I'd still like to bet with the Central Banks (see <a href="http://www.varunkhandelwal.com/2010/05/wanna-make-money-go-long-equityshort.html">previous article</a>), just that my conviction levels are lower now. </div><div><br /></div><div>Trade safe !</div><div><br /></div><div>ps.. stay out of currencies.. they're a rigged game now.. and the house may not have complete control !</div>Varun Khandelwalnoreply@blogger.com0tag:blogger.com,1999:blog-3423996701597256548.post-1998748977765802452010-05-21T10:07:00.006+05:302010-05-21T10:54:48.161+05:30Wanna make money...? go long equity/short goldWe're witnessing historic times.. Just 18 months after the largest financial crisis since the Great Depression, speculators around the world are playing yet another end-of-world game.. and a game with higher stakes.<br /><br />Here's what's happening.. Short Euro, Long Credit Default Swaps of the UK, France, PIIGS.. eventually the US and Japan. Short risk assets, move money into dollars.. but people are worried about the debt situation in the US as well so the natural end of world trade commodity - gold - should go up. These trades will payoff if the Euro collapses..and if it does, then one can move to other OECD sovereigns and play the same game. Greek, small as it may be, has become the unfortunate playground for the clash between Central Banks and Speculators.<br /><br />Greek, which should ideally have been allowed to restructure its debt, can't be let to do that as the European banking system will then need to be bailed out. Fixed Income desks around Europe have been in the <em>convergence </em>trade since after the institution of the Euro - they go long high yielding bonds from countries such as the PIIGS and short the bunds to earn the spread (assumption was that credit risk of all euro countries is equal).. If the Greeks restructure their debt, banks in the Euro zone will have to take large hits on their bond portfolio which contribute towards their Capital Adequacy Ratio.. They will then need to be bailed out/recapitalized by the public sector. Markets will freeze and we'll see an uglier version of 2008 banking crisis as contagion will spread to other asset classes. In short, to avoid a really large, potentially unmanageable, bailout of the entire Anglo-Saxon financial system, private mark downs on Greek government debt needs to be avoided.<br /><br />The reasons why I think the Central Banks can win this war against speculators on the currency front are simple<br /><ul><li>they've got infinite capital (they can print), and they don't care about MTM. The P/L is not their target, nor is their compensation linked to the P/L</li><li>they understand the stakes and they have the legal powers (which was not the case when the US authorities had to let Lehman go.. they understood the stakes but did not have the legal authority to save Lehman)</li></ul><p>For the Central Banks and Governments to win against the speculators to win against the speculators, in addition to the interventions, they also need to cut debt to inspire market confidence in the longer term. Unfortuantely, the incentives created by the electoral cycle are misaligned with the economic cycle; cutting salaries now tends to cause governments to lose support while the sops associated with higher debts normally bring in more votes.</p><p>The immediate downside risk to global financial markets right now is not economic or financial activity;its political instability in Greece. If Greece decends into political and civil chaos, all bets are off. Best thing to do would be to wait till things settle down. If not, go as levered long as you can on equities for a really rapid 5% gain (and a 5% fall in gold)...</p><p> </p>Varun Khandelwalnoreply@blogger.com0